Comments from US Commerce Secretary Wilbur Ross and Treasury Secretary Steven Mnuchin set the tone on Wednesday as downward pressure remained firmly on the USD. Speaking at the World Economic Forum in Davos, Mnuchin endorsed the dollar’s decline as a benefit to the American economy, before Ross suggested the Trump administration could enact further tariffs and would fight harder to protect its exporters. Most major stock markets were down after the news, meanwhile the FTSE fell over 1%, pressured by the rise in the pound. The Bloomberg Dollar Spot Index also fell another 0.9% while EURUSD jumped to a session high of 1.2411 and GBPUSD extended gains as high as 1.4241.

In terms of data, the Office for National Statistics (ONS) showed that the UK unemployment rate had remained unchanged at 4.3% in the three months to November, in line with both consensus and Investec expectations. Employment rose by 102k to a record high (32.207mn) against expectations for it to drop by 12k, suggesting that the recent weakness is largely a quirk of the sampling methodology of the survey and has now reverted back to the trend of strong job creation seen previously. Indeed, the ONS noted that job vacancies were at a record high of 810k in the three months to December. Meanwhile, joblessness fell by 3k. Headline earnings growth stood unchanged at 2.5% 3m yoy in November (consensus 2.5%, Investec 2.5%), while regular pay was a touch stronger at 2.4% 3m yoy versus the 2.3% 3m yoy recorded in October.

January’s Euro area Composite PMI rose again to 58.6, from 58.1, beating the market consensus of an edging back to 57.9 (Investec 58.3). That marks an almost 12 year high for the survey. Sector details from the survey saw manufacturing activity edge back to 59.6 from 60.6, although it is still worth remembering that this is still a very buoyant level. Meanwhile service sector activity firmed to 57.6 from 56.6. What is additionally notable from the survey is that the forward looking components failed to show any sign of an easing in momentum, with the manufacturing future output index reaching 67.9, a record high and the new business index in the service sector reaching its firmest level since August 2007. Overall January’s PMI survey points to the Euro area maintaining a strong pace of activity at the start of 2018, with signs that this momentum is likely to be carried forward. One final point that the ECB may take note of, is reported price pressures were recorded at near seven-year highs.

In other news, the Rand’s rise convincingly saw USDZAR trade through the key support level (USDZAR 12.000) yesterday, as positive comments from South African officials in Davos filtered into the marker. This was backed up by CPI inflation lifting to 4.7% y/y in December from 4.6% y/y in November, mainly on account of increased upside price pressures stemming from the fuel component.

Today’s key event will be The ECB Governing Council (GC). The announcement on policy will take place at GMT 12.45, while Mario Draghi’s press conference will follow at 13.30. No changes at all to policy itself are likely. The Deposit Rate will almost certainly be held at -0.40% and the monthly amount of QE steady at €30bn per month. The main issue surrounds the language of the introductory statement (due at 13.30) and whether the hawks on the GC get their way on hinting that asset purchases are not likely to be extended in terms of size or duration (beyond the current September 2018 end date). But the euro has strengthened materially this year, while the yield curve is steepening and the net result is that the GC may well opt to play it safe this time by keeping the same language as in December. Moreover it would not be a surprise if Draghi were try to talk down the euro, although whether he will succeed here is another matter

The day ahead

Today marks the first time a US preseident has addressed the World Economic Forum in 18 years. President Trump is expected to deliver the “America First” agenda In Davos, reiterating comments made by his most senior economic advisors that a weaker dollar will benefit US exports and make U.S. products more competitive internationally. This stance has alrady been challenged by a number of Davos Delegates, most of whom feel free trade and globalization are positive economic forces. As noted above the one person the market will be very keen to hear from is the the ECB chairman Mario Draghi who is due to speak at the central bank meeting today. There is a consensus in the market that Draghi will address the pace in the rise of the euro, whether this will arrest the euro's move higher remains to be seen. 

Thought of the day

With Sterling’s recent rally and the continued US Dollar weakness, the Pound has moved from 1.3460 on 11th January 2018, to highs of 1.4329 this morning! In just two short weeks Sterling has appreciated over 6%. At Investec we are always coming up with trade ideas that suit your business and help you proactively manage your FX risk more efficiently. The Release Forward is a product that has proved popular with our clients as it is a guaranteed hedge, providing you with a ‘protected rate’ to buy foreign currency on an agreed future date. However, this obligation to buy currency at the protected rate will disappear should the market rate trade at or below the limit rate during the life of the contract. If you become ‘released’ from the obligation, then you are able to take full benefit from favourable currency moves. An indicative 6 month GBPUSD currently offers a protected rate of 1.4000 and a limit rate of 1.3800, should 1.3800 trade any time during the life of the contract you will have no obligation and be able to benefit in favourable currency moves, whilst being fully protected with a worst case of 1.4000. To discuss firm levels, please call your Investec Dealing team on 0800 055 6339.